Sources of Superior Performance Above Normal Profits (in Excess of the Competitive Level) Avoid Be Better Than Competitors CompetitionAttractiv Attractive Attracti Strategic Cost Differentiatione Group ve Advantage AdvantageIndustry NicheEntry Mobility IsolatingBarriers Barriers Mechanisms
Sources of Competitive Advantage COST t ro duc ADVANTAGE il ar p r cost Sim t lowe aCOMPETITIVEADVANTAGE Pri ce p fro rem mu niq ium ue pro duc DIFFERENTIATION t ADVANTAGE
The Experience Curve The “Law of Experience” 1992 The unit cost value added to a standard product declines by a constant % (typically 20-30%) each time cumulative output doubles. 1994Cost perunit ofoutput (in 1996real $) 1998 2000 2002 200 4 Cumulative Output
Examples of Experience Curves Japanese clocks & watches, 1962-72 UK refrigerators, 1957-71 50 100 200 30015K 20K 30K Price Index 1960 Yen 75% 70% slope 100K 200K 500K 1,000K 5 10 50 Accumulated unit production Accumulated units (millions) (millions)
Drivers of Cost Advantage ECONOMIES OF SCALE • Indivisiblities • Specialization and division of laborECONOMIES OF LEARNING • Increased dexterity • Improved organizational routines • Process innovationPRODUCTION TECHNIQUES • Reengineering business processes PRODUCT DESIGN • Standardizing designs & components • Design for manufacture • Location advantages INPUT COSTS • Ownership of low-cost inputs • Non-union labor • Bargaining power CAPACITY UTILIZATION • Ratio of fixed to variable costs • Speed of capacity adjustment RESIDUAL EFFICIENCY • Organizational slack; Motivation & culture; Managerial efficiency
Economies of Scale: The Long-Run Cost Curve for a Plant Sources of scale economies: - technical input/output relationships - indivisibilities - specializationCost perunit ofoutput Minimum Units of output Efficient Plant Size: per period the point where most scale economies are exhausted
Scale Economies in Advertising: U.S. Soft DrinksDespite the massive advertising budgets of brand leaders Coke and Pepsi, their main brands incurlower advertising costs per unit of sales than their smaller rivals. 0.20 Advertising Expenditure ($ per case) Schweppes SF Dr. Pepper 0.15 Tab Diet 7-Up Diet Pepsi Diet Rite 0.10 Fresca Seven Up 0.05 Sprite Dr. Pepper Pepsi Coke 0.02 10 20 50 100 200 500 1,000 Annual sales volume (millions of cases)
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES R&D TESTING, GOODS SALES DISTRI- DEALER & PARTSPURCH- DESIGN COMPONENT ASSEMBLY QUALITY INVEN- & INVEN- BUTION CUSTOMERASING ENGNRNG MFR CONTROL TORIES MKITG SUPPORT TORIES STAGE 2. ALLOCATE TOTAL COSTS
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued) --Plant scale for each -- Level of quality targets -- No. of dealers STAGE component -- Frequency of defects -- Sales / dealer -- Process technology -- Level of dealer3. -- Plant location support -- Run length -- Frequency of defects -- Capacity utilization under warrantyIDENTIFY COST PARTS PURCH- R&D COMPONENT ASSEMBLY TESTING, GOODS SALES DISTRI- DEALER & INVEN- DESIGN QUALITY INVEN- ASING MFR & TORIES ENGNRNG CONTROL TORIES BUTION CUSTOMER MKITG SUPPORTDRIVERS paidPrices --Size of commitment -- Plant scale --Cyclicality &depend on: --Productivity of -- Flexibility of production predictability of sales-- Order size R&D/design -- No. of models per plant --Customers’--Purchases per --No. & frequency of new -- Degree of automation willingness to wait supplier models -- Sales / model-- Bargaining power -- Wage levels-- Supplier location -- Capacity utilization
Applying the Value Chain to Cost Analysis: The Case of Automobile Manufacture (continued)STAGE 4. IDENTIFY LINKAGES Designing different models around Consolidation of orders to increase common components and platforms discounts, increases inventories reduces manufacturing costs PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR Higher quality parts and materials Higher quality in manufacturing reduces costs of defects reduces warranty costs at later stagesAGE 5. RECCOMENDATIONS FOR COST REDUCTION
The Nature of Differentiation DEFINITION: “Providing something unique that is valuable to the buyer beyond simply offering a low price.” (M. Porter) THE KEY IS TO CREATE VALUE FOR THE CUSTOMER TANGIBLE DIFFERENTATION INTANGIBLEObservable product characteristics: DIFFERENTATION size, color, materials, etc. Unobservable and subjective performance characteristics that appeal to packaging customer’s image, status, identity, complementary services and desire for exclusivity TOTAL CUSTOMER RESPONSIVENESS Differentiation not just about the product, it embraces the whole relationship between the supplier and the customer.
Identifying Differentiation Potential: The Demand SideTHE PRODUCT What needs does it What are key satisfy? attributes? FORMULATE DIFFERENTIATION Relate patterns of STRATEGY customer preferences to product attributes • Select product By what criteria positioning in relation do they choose? to product attributesTHE • Select target customerCUSTOMER What price premiums group do product attributes command? • Ensure customer / product compatibility What What are demographic, • Evaluate costs and motivates sociological, benefits of them? psychological correlates differentiation of customer behavior?
Using the Value Chain to Identify Differentiation Potential on the Supply Side MIS that supports fast Training to support Unique product features. response capabilities customer service Fast new product excellence development FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES Customer technical support. Consumer credit. Availability ofQuality of Defect free Fast delivery. Building brand sparescomponents & products. Wide Efficient order reputationmaterials variety processing
Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture 1 5 2 3 4 Purchasing Inventory holding Processing Canning Marketing Distribution Purchasing Inventory holding Design Engineering Manufacturing Inventory holding Distribution Sales support Service & technical & aluminum Supplies of steel CAN MAKER CANNER1. Distinctive can design can assist canners’ marketing activities.2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.3. Frequent, reliable delivery can permit canner to adopt JIT can supply.4. Efficient order processing system can reduce customers’ ordering costs.5. Competent technical support can increase canner’s efficiency of plant utilization.
INDUSTRY ANALYSISAND POSITIONINGDetermining Industry Attractiveness and Identifying Strategic Opportunities